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Worker classification

More About Worker classification

Tax Analysts provides news, analysis, and commentary on tax-related topics, including the latest developments in worker classification. Employee classification policy is a significant issue for employers, who must correctly determine whether an individual providing services to the employer is either an employee or an independent contractor.

Employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and unemployment tax on wages paid to employees. Employers are not required to withhold or pay taxes on payments made to independent contractors, who are considered self-employed and subject to self-employment tax and federal income tax.

Whether an individual is an employee or an independent contractor is based on the business relationship between the employer and worker. Individuals performing services can be independent contractors, common law employees, statutory employees, or statutory nonemployees. Evidence of a worker’s degree of control and independence is relevant to determining whether a worker is an employee or independent contractor.

Factors significant in analyzing the degree of control and independence include behavioral, financial, and the type of relationship that exists between the worker and the employer. Employers can file Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” to have the IRS officially determine a worker’s status.

Employers that misclassify employees as independent contractors without any reasonable basis may be liable for employment taxes for the worker without and relief. Employers with a reasonable basis for the misclassification may not be required to pay the employment taxes for the worker.

The IRS’s Voluntary Classification Settlement Program allows employers an opportunity to reclassify workers as employees for future tax periods in exchange for partial relief from federal employment taxes.